Near-Term Bumpiness Expected

Craig Sebastiano | February 5, 2008

Stock markets are likely to face further declines this spring because of weakness in the U.S. economy and the possibility of more writedowns by North American banks, according to a report by CIBC World Markets.

The combination of a decline in housing prices in the United States and rising default rates could trigger as much as another US$30 to $50 billion in asset writedowns by North American banks over the next quarter, says Jeff Rubin, the brokerage’s chief strategist and chief economist. This, together with a struggling U.S. economy might be a catalyst for another 5% correction.

To guard against interim volatility, he is cutting the weighting of stocks in his model portfolio by nine percentage points and putting that money into bonds for an asset mix of 56% in stocks, 42% in bonds and 2% in cash.

Despite the negative short-term prospects, CIBC is forecasting the equity markets to bounce back later in the year.

“The advent of triple-digit oil prices, US$1,000 per ounce gold, and continued strength in base metals prices should support a 14,500 TSX by year-end,” says the report, “and a 16,200 level by the end of next year.”